China Swaps Decline as PBOC Seen Relaxing Reserve Requirements

China’s interest-rate swaps fell after a Xinhua News Agency report added to signs the central bank will ease monetary policy to support the economy.

The People’s Bank of China will lower lenders’ reserve requirements and inject cash into the financial system using reverse repurchase agreements and bill redemptions, Xinhua cited an unidentified central bank official as saying. The monetary authority last reduced the proportion of cash lenders must set aside in February, lowering the reserve ratio for major lenders by half a percentage point to 20.50 percent.

“Rates markets will watch for any signals on further monetary easing, especially in China, and we believe that a reserve-ratio cut will come soon, most likely still this month,” Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB, wrote in a note to clients today. The interest-rate swaps “should fall after such a move and may be impacted by the growing speculation,” he said.

The one-year swap rate, the fixed cost to receive the seven-day repurchase rate, fell three basis points, or 0.03 percentage point, to 3.21 percent in Shanghai, according to data compiled by Bloomberg.

The seven-day repo rate, a gauge of funding availability in the financial system, rose five basis points to 3.81 percent in Shanghai, according to a weighted average compiled by the National Interbank Funding Center.

China’s State Council, or Cabinet, pledged to prepare policy tools to cope with economic challenges, according to a government statement last week that summarized a meeting chaired by Premier Wen Jiabao. Demand for funds is increasing in the money market as companies make annual tax payments due this month and in May, according to Ju Wang, a Barclays Capital strategist in Singapore.

The People’s Bank of China sold 20 billion yuan of 91-day repurchase agreements at a yield of 3.14 percent today, according to a statement posted on the central bank’s website.

The yield on 3.51 percent government bonds due February 2022 was little changed at 3.53 percent, according to the National Interbank Funding Center.